This paper formalizes in a fully-rational model the popular idea that politicians
perceive an electoral cost in adopting costly reforms with future benefits and reconciles
it with the evidence that reformist governments are not punished by voters.
To do so, it proposes a model of elections where political ability is ex-ante unknown
and investment in reforms is unobservable. On the one hand, elections improve accountability
and allow to keep well-performing incumbents. On the other, politicians
make too little reforms in an attempt to signal high ability and increase their reappointment
probability. Although in a rational expectation equilibrium voters cannot
be fooled and hence reelection does not depend on reforms, the strategy of underinvesting
in reforms is nonetheless sustained by out-of-equilibrium beliefs. Contrary to
the conventional wisdom, uncertainty makes reforms more politically viable and may,
under some conditions, increase social welfare. The model is then used to study how
political rewards can be set so as to maximize social welfare and the desirability of imposing
a one-term limit to governments. The predictions of this theory are consistent
with a number of empirical regularities on the determinants of reforms and reelection.
They are also consistent with a new stylized fact documented in this paper: economic
uncertainty is associated to more reforms in a panel of 20 OECD countries.